Fire Insurance Withholding FAQ

  • Reviewed 03/12/2020

FAQ
What is the purpose of the fire insurance withholding program?

The fire insurance withholding program is designed to provide municipalities with some financial protection against the cost of cleaning up a damaged structure following a fire loss. Participating municipalities may be eligible to receive a portion of a policyholder's final settlement to be held in a specified escrow account until the structure is repaired, replaced, or demolished, at which time the escrow funds would be released by the municipality back to the property owner. If the property owner does not repair the structure, the municipality may use the funds to repair, replace, or demolish the damaged structure.

Municipalities - How can we participate?

The Department of Insurance and Financial Services (DIFS) compiles and maintains the list of participating municipalities. The list is updated each month and is sent electronically to all property and casualty insurance companies, participating municipalities, and DIFS’ list of Interested Parties. In order to participate, municipalities must pass a resolution and submit it to DIFS along with the Fire Insurance Withholding Program Enrollment and Notification application (FIS 0376). The effective date of participation will be 30 days after DIFS’ next publication. Instructions and forms are on DIFS’ website www.michigan.gov/DIFS.

Fire Insurance Withholding Program Enrollment and Notification

Municipalities - Under which section should we enroll?

Enrollment in this program is based on the population of the municipality and/or the county in which it is located.

  • Section 2227 of the Michigan Insurance Code applies to any municipality that is located in:
    • Counties of 425,000 or more, regardless of the size of the municipality (currently Genesee, Kent, Macomb, Oakland, Wayne), or
    • Cities of 50,000 or more, regardless of the size of the county.
  • Section 2845 of the Michigan Insurance Code applies to any municipality of less than 50,000 in population located in counties of less than 425,000.
Besides population requirements, are there any differences between Sections 2845 and 2227?

The only difference between the two Sections is that additional perils are eligible for larger municipalities:

  • Section 2845 pertains to real property damage caused by fire or explosion.
  • Section 2227 pertains to real property damage caused by fire or explosion, as well as losses caused by the perils of vandalism, malicious mischief, wind, hail, riot, or civil commotion.
Are all losses covered by this program?

No. Losses caused by the perils referenced above must also meet the following guidelines of the program:

  • Damage exceeds 49% of the insurance on the real property, and
  • The property is located within the boundaries of a municipality that is participating in the program, and
  • The insurance company has no evidence that the insured has hired a licensed contractor for repairs to the property (within 15 days after agreement on final settlement).
Is a mobile home considered "real property" for purposes of this program?

If the structure has utilities attached and/or a foundation, and permanent residents, DIFS considers this a permanent structure, which would be included in the definition of real property.

Insurance Companies - How do we calculate the escrow amount?

The amount to be escrowed is 25% of the actual cash value of the insured real property at time of loss, or 25% of the final settlement, whichever is less.

For residential property the maximum escrow amount is adjusted annually by DIFS in accordance with the consumer price index. The adjusted amount may be found on DIFS’ website www.michigan.gov/DIFS and is also reflected in the upper right corner of the published list of participating municipalities.

For commercial property, the amount to be escrowed is 25% of the final settlement, with no maximum.

Fire Insurance Withholding Maximum Escrow

Fire Insurance Withholding Program List

Is the maximum escrow amount the total that can be in the account, or the maximum amount per claim?

The maximum escrow amount, which is updated annually, is per policy—not the total that can be in the account.

Municipalities - What do I need to do after a loss has occurred in our municipality?

The responsibility is on the insurance company to notify you. You may contact the insurance company, if known, to notify them a loss has occurred in a participating municipality and you are interested in having the eligible amount of the settlement placed in escrow.

In the event of a loss, what are the responsibilities of the insurance company and the participating municipality?

In the event of a loss in one of the participating municipalities the following steps should occur:

  • Within 15 days after agreement on a final settlement between the insured and the insurer, the insurance company determines whether the loss meets the guidelines of the program.  If the insured has filed with the insurer evidence of a contract to repair the property and consents to the payment of funds directly to the contractor performing the repair services, the insurer should notify the participating municipality there will not be a withholding because of repair contract.  (Section 2845(13) & Section 2227(15)).
  • If the program eligibility guidelines are met, the insurer sends written notice of the withholding to the following:
    •  contact person listed for the particular municipality;
    •  the insured;
    • any mortgagee; and
    • the court, if any judgment was entered.

      (Sections 2227(1) & 2845(1) covers the required elements of this written notification)
       
  • The municipality has 15 days after the mailing of the notice from the insurance company to respond and request the withheld amount be paid into its escrow account (Sections 2845(1)(f) & 2227(1)(f)).  A copy of the municipality’s response to the insurance company must also be sent to the insured, any mortgagees, and the court, as applicable, advising that they have 10 days from the mailing to object to the retention of the withheld amount (Sections 2845(2)(d) & 2227(2)(d)).
Insurance Company - Where can I get the forms to notify the involved parties that the loss meets the eligibility criteria of the Fire Insurance Withholding Program?

DIFS does not have a form; each insurance company is responsible for their own form or letter.

 

When can the money be disbursed after it has been escrowed?

The municipality must immediately forward the policy proceeds, except any interest earned while in escrow, to the insured or to the service contractor as outlined below upon reasonable proof (defined in Sections 2845(5) & 2227(5)) of one of the following:

  • The damaged or destroyed structure has been repaired or replaced except to the extent that the amount withheld is needed to complete the repairs.
  • The damaged or destroyed structure has been removed and completely cleared in compliance with local code requirements.
  • The insured may seek resolution with the municipality or seek relief in circuit court if they feel the municipality has not properly disbursed the funds. (Sections 2227(2)(d) & 2845(2)(d))

The insured may seek resolution with the municipality or seek relief in circuit court if they feel the municipality has not properly disbursed the funds. (Sections 2227(2)(d) & 2845(2)(d)).

If reasonable proof is not presented to the municipality within 120 days after receiving the portion of policy proceeds, the municipality may use the retained proceeds to secure, repair, or demolish the damaged or destroyed structure and clear the insured property so it complies with local code requirements. Any unused portion of the retained proceeds shall be returned to the insured. The municipality may extend the 120 day time period.

Municipality - What if the insurance company failed to notify us about the escrow opportunity and paid the insured in full?

If an insurance company settles a claim without notifying a participating municipality of the loss, the municipality may file a written complaint with DIFS. The complaint should include the name of policyholder/property owner, date of loss, and name of the insurance company. You may file a complaint online by visiting www.michigan.gov/DIFScomplaints or calling 1-877-999-6442 to request a complaint form.

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    The answers provided are not meant to be a substitute for legal advice.